IDACORP INC quarterly report, Q1 FY2016

IDACORP, Inc. — Q1 2016 Form 10-Q

Quarter ended March 31, 2016; unaudited interim results. IDACORP is a holding company whose principal operating subsidiary is Idaho Power, a regulated electric utility serving southern Idaho and eastern Oregon. Dollar amounts below are in millions unless stated otherwise. Interim results are seasonal and are not necessarily indicative of full-year results.

Financial performance

Idaho Power reported net income of $25.5 million versus $23.5 million. General business revenue increased 2% to $253.4 million, with customer growth and residential usage gains partly offset by lower off-system sales revenue. Customer count rose 1.8% year over year to 525,981. Lower income tax expense materially aided earnings: IDACORP’s effective tax rate was 14.6%, compared with 20.7% a year earlier, partly reflecting a $1.6 million share-based compensation tax benefit from early adoption of new accounting guidance and $0.5 million of additional investment tax credit amortization.

Balance sheet, debt and liquidity

At March 31, 2016, IDACORP reported cash of $219.7 million, total assets of $6.13 billion, long-term debt of $1.74 billion and current maturities of long-term debt of $101.1 million. IDACORP also had $23.3 million of commercial paper outstanding. Its quarter-end debt and equity ratios for covenant purposes were 48% and 52%, respectively; the company was in compliance with its financial covenants.

Net short-term borrowing availability was $76.7 million for IDACORP and $275.8 million for Idaho Power, supported by revolving facilities of $100 million and $300 million, respectively. Management said existing cash, operating cash flows and credit arrangements should be sufficient to meet requirements for at least the next 12 months. Operating cash flow fell year over year, largely due to regulatory-account timing, working-capital changes and lower income-tax-related payments received by Idaho Power.

Idaho Power issued $120 million of 4.05% first mortgage bonds due 2046 in March. On April 11, after quarter-end, it redeemed $100 million of 6.15% notes due 2019 and paid a $14 million make-whole premium. Management expected an approximately $5.5 million income tax benefit from the premium in Q2 2016 and an incremental net income benefit from the lower interest rate.

Changes, outlook and management commentary

• Management’s outlook remained consistent with its 2015 year-end discussion. It expects positive customer growth and approximately $1.5 billion of capital expenditures over 2016–2020. Estimated construction expenditures are $300–310 million for 2016, $275–285 million for 2017 and $860–920 million for 2018–2020.
• IDACORP maintained its long-term target dividend payout ratio of 50%–60% of sustainable earnings. Management said Idaho Power would continue to assess whether and when to file a general rate case.
• Idaho Power filed for a $17.3 million net increase in Idaho power-cost adjustment rates for June 2016–May 2017 and an $11.2 million increase in its fixed-cost adjustment for the same period. Both requests were pending at the report date; the PCA rate impact is largely offset by related power-supply costs.
• Reported FCA revenue was $4.9 million higher year over year, but comparability is affected by a $7.4 million retroactive FCA adjustment for Q1 2015 that was recorded in Q2 2015. Applying the revised method to Q1 2015 would make the Q1 2016 FCA comparison a $2.5 million decrease.
• Power supply costs reflected more PURPA purchases and greater natural-gas generation, while off-system sales revenue fell 30% to $9.2 million as average sale prices declined 26%. Idaho and Oregon PCA mechanisms mitigate much of the earnings impact of power-cost fluctuations, but deferrals affect cash timing.
• Nine solar power purchase agreements were terminated after counterparty breaches, reducing Idaho Power’s contractual payment obligations by approximately $201 million over the contracts’ 20-year terms.
• Idaho Power expects at least $10 million of additional pension contributions in 2016 and may contribute up to a further $30 million. It contributed $10 million in April.

Risks, contingencies and unusual items

• Key risks include regulatory decisions and cost recovery, weather and hydrology, wholesale power prices, customer demand, fuel and purchased-power costs, environmental compliance, water rights and Hells Canyon Complex relicensing, project permitting, financing access and credit ratings.
• Idaho Power’s Hells Canyon relicensing costs totaled $226 million in construction work in progress at quarter-end. Management estimated annual relicensing costs of $20–30 million, including AFUDC, until a new license is issued; timing, terms and ultimate costs remain uncertain.
• A bankruptcy trustee’s Hoku Corporation claim seeks recovery of payments to Idaho Power of up to approximately $36 million. The case was at a preliminary stage, and the company could not estimate a possible loss or range; Idaho Power intends to defend the claim.
• Idaho Power’s share of the Bridger Coal Company reclamation guarantee was $73 million, compared with a $71 million reclamation trust fund. Management considered the guarantee’s estimated fair value minimal, citing the fund and ability to add a coal-sales surcharge.
• Management said pending environmental regulations could require significant future capital investment, but the financial impact could not be estimated. The Boardman coal plant, in which Idaho Power owns 10%, is scheduled to cease coal operations by the end of 2020.
• If Idaho Power’s unsecured debt fell below investment grade, counterparties could demand additional collateral. The filing estimated approximately $8.9 million of additional collateral exposure under current portfolio and market conditions.
• The interim statements received an independent accountant’s review, not an audit opinion. Management reported effective disclosure controls and no material change in internal control during the quarter.

Important facts for investors to verify

• Regulatory outcomes and timing for the pending Idaho PCA and FCA filings, and whether a general rate case will be pursued.
• Whether forecast capital spending, project cost recovery and financing plans remain on track, particularly for major transmission and environmental projects.
• Full-year earnings effects of the share-based tax accounting change and ADITC amortization, which management estimated at approximately $2 million for 2016 but said could change.
• Developments in the Hoku claim, Hells Canyon relicensing and environmental proceedings, including any change to estimated costs or contingencies.
• Future cash flow and liquidity, considering PCA-related timing, pension funding, debt maturities and collateral exposure from a credit downgrade.